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Mercedes is quietly becoming Tesla’s biggest rival

Mercedes-Benz is expected to introduce a new all-electric EQ SUV while also...

(Mercedes-Benz)

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Daimler is investing $11 billion to electrify its fleet of vehicles by 2020.

Tesla's stock has rivaled General Motors and Ford as people continue to clamor for the high-tech, electric vehicles.

The two automakers will compete in 2020 when they release their battery-powered SUVs.

Tesla has had a meteoric rise as an underdog company, but the next five years could be its biggest challenge yet.

Major automakers from across the globe are preparing massive electric-car rollouts, perhaps none as large as Daimler, Mercedes' parent company. The German automaker plans to electrify its fleet of cars by 2020 and is investing $11 billion to make it happen.

In many ways, taking down Tesla is no easy feat. The company has secured brand loyalty on par with Apple, which can be attributed to the admiration surrounding Tesla CEO Elon Musk's stated commitment to building a sustainable future. It has pushed the industry in ways that have never been seen before, from implementing over-the-air updates to challenging the traditional dealership model.

Yet Tesla has some weaknesses, mostly its struggle to execute on production. The Model S and Model X both suffered delays and the company has yet to overcome its manufacturing hurdles — Tesla produced 260 Model 3s in the third-quarter out of a targeted 1,500 sedans due to "production bottlenecks."

Daimler has a shot of taking down Tesla, but it won't be easy.

Daimler has to rebrand itself to compete with Tesla

Mercedes isn't really known as an electric-car brand, but it hopes to change that.

(Mercedes-Benz)

Daimler hasn't been shy about its intention to take on Tesla.

The Germany automaker announced in September that it would invest $1 billion in its Alabama plant to build an electric SUV, which is slated to hit the market in 2020. Many media outlets were quick to point out this was a direct affront to Tesla, though Musk didn't see it that way:

Musk's tweet didn't prompt Daimler's $10 billion investment, as the company had announced the electric-car funding in 2016.

It would also be reductive to argue that Tesla's prowess in the EV space was the single defining characteristic that pushed Daimler to embrace electric cars. China's announcement that it will ban diesel- and gas-powered cars going forward is a major influencing factor, considering the country is the largest auto market in the world.

Likely, Daimler's recent competitive streak with Tesla on Twitter is more of an acknowledgment that to win the electric-vehicle race requires convincing consumers that Mercedes cars can compete with the products of Elon Musk. If electric cars are the inevitable future, Daimler can't ignore Tesla's position in the market.

Like all German car companies, Daimler's identity is connected to the diesel engine — Mercedes cars are seen as the classic speed machines of the Autobahn rather than high-tech models of a driverless future. It will take some work for Mercedes to rebrand itself as a Tesla competitor.

"It's not in their DNA and their history because they are much more of a performance brand," Gary Silberg, the Americas head of automotive at KPMG, said in an interview. "The electric architecture of the vehicle is different than their great prowess with diesel and ICE engines, so that's certainly a change."

Daimler will look to beat Tesla in China

Tesla's factory in Shanghai will focus on Model 3 production at first.

(Timothy Artman/Tesla)

The fiercest competition will happen in China — not only because it's the largest car market in the world, but because there's still time to carve out a sizeable portion of the market.

Tesla is working fast to lay the groundwork for a push in China. It plans to build a factory in Shanghai that will start producing cars in 2020. It also secured backing from Tencent, which Musk said will allow the Chinese firm to become a passive advisor.

Daimler already has set-up a joint venture with Chinese automaker BAIC. The two announced in July they were investing $750 million in Chinese electric-vehicle production so Mercedes can secure a "substantial share" of the market by 2025.

Wilko Stark, Mercedes' vice president of strategy, said in an interview that China will ultimately be the company's most important market.

"China is our biggest market and will stay so in the future by far," Stark said. "As an incumbent, we have a big advantage because we know the Chinese market very well."

Daimler will also aim to replicate the 'Tesla ecosystem'

Daimler has also started laying the foundation to take on Tesla by mimicking Musk's vision for a solar-based ecosystem.

Musk has said that the ideal home would have solar panels on the roof, a Tesla in the garage, and a home battery to tie everything together.

Tesla launched an energy division in 2015 to start selling its residential battery, the Powerwall. The automaker bought SolarCity in a deal worth $2.1 billion last November to vertically integrate all of the different pieces.

Mercedes took a shot at Tesla in March when it launched its home battery on Tesla's home turf of California, which is also sold in Germany and the United Kingdom. The US launch was due to a new partnership with solar-panel installer Vivint.

Boris von Bormann, CEO of Mercedes' energy division, said the Vivint partnership was meant to support Daimler's electric vehicle push in the US in 2019.

"We’re looking really to build the total ecosystem around the vehicle," Bormann told Business Insider. "We’re looking at how we prepare the infrastructure so that the transition from a combustion engine to an electric engine happens as smoothly as possible."

Daimler is investing $1 billion in its Alabama plant to build the Mercedes EQ, an electric SUV that will hit the market in 2020. Stark said Daimler deliberately chose to release an SUV because demand for the larger vehicles have been high the last several years.

The EQ will hit the market at the same time as Tesla's Model Y SUV, meaning Tesla will have direct competition for the first time. Tesla did have some competition this year when its Model 3 hit the market at the same time as the Chevy Bolt, but it's difficult to compare completely different vehicle types with varying price tags.

"The US will be a key footprint for our battery-electric vehicle strategy," Wilko Andreas Stark, Mercedes' VP of strategy, said in an interview. "We are pretty confident we will convince the customer that [the EQ] will be the best offer on the market."

There's no clear winner in the heated EV race — but Tesla will need to prepare for competition

Daimler's sheer size doesn't necessarily mean it has the company beat; many people buy a Tesla because they want a Tesla, not an electric car. Tesla is also a popular choice among lucrative Chinese buyers.

But it's clear that Tesla has thrived in a market with very few viable contenders — 2020 will be the first test as to whether Tesla can survive when a giant like Daimler tries to eat its lunch.

"Tesla did a great job as a frontrunner, but all of the others will come now," Stark said. "We believe our vehicles coming up are more attractive to Tesla in the long term."

KPMG's Silberg said Tesla has an advantage when it comes to its story and general branding. Tesla hasn't had to pay a dime for marketing and still secured 455,000 reservations for the Model 3. People are fascinated with the company's storyline that Musk has developed by challenging automotive norms, from releasing Autopilot to developing a super-fast charging infrastructure.

Daimler will need to convince consumers it can compete as a bespoke brand without the classic diesel engine. But it's reputation as a reliable manufacturer shouldn't be overlooked. As Tesla continues to struggle to execute on production for the Model 3, buyers may be inclined to go with the more reliable Mercedes SUV down the road.

"I don't think anyone would argue that Mercedes' doesn't have world-class manufacturing prowess and Tesla is learning," Silberg said. "They have great manufacturing prowess and they’ve been in China longer and have a partner — and that’s absolutely an advantage."